One of the most common arguments for why a stock is a poor investment is past price performance -- specifically, that a company's stock has stayed flat or gone down over some period of time. Critics have frequently employed that argument to describe Coca-Cola
Coca-Cola was hardly the only company caught up in a bidding frenzy in 2000. During the frothy dot-com bubble, companies such as Corning
Digging deeper
One of the first reasons people give for Coca-Cola's unsuitability for investors' portfolios is that the stock price has gone nowhere over the past decade. Because of this, the thinking goes, the stock must be a bad investment today. Before we draw such a conclusion, let's look at the company's results over the past decade:
|
Metric |
Fiscal Year 2000 |
Fiscal Year 2010 |
% Change |
|---|---|---|---|
|
Net income |
$2,177 |
$11,809 |
442.4% |
|
Sales |
$17,354 |
$35,119 |
102.4% |
|
Market cap (end of fiscal year) |
$151,112 |
$152,720 |
1.1% |
|
Price-to-Earnings ratio |
69.4 |
12.9 |
(81.4%) |
|
Price-to-Sales ratio |
8.7 |
4.3 |
(50.1%) |
Source: Capital IQ, a division of Standard & Poor's.
All dollar amounts in millions.
The first thing that pops out is how fantastically expensive Coca-Cola was in 2000. The company ended the 2000 fiscal year trading at mind-boggling multiples of 69 times earnings and nine times sales. Those are rather high multiples to pay for a beverage company that was already fetching $151 billion at the time.
Fast-forward to 2010 and we see a different picture. Despite the market cap not going anywhere, a glance at the numbers actually shows that the company has performed quite well. From 2000 to 2010, Coca-Cola doubled its sales numbers while more than quintupling net income. Many people would be surprised to see that the company's numbers have gone up so much.
It's clear that those who badmouth Coca-Cola based solely on stock performance are not presenting the full picture. The company has continued to improve virtually every financial metric over the past 10 years. Unfortunately, investors' excessively high expectations still doomed the stock to failure.
All told, it took 10 years of a falling share price and improving earnings for the stock to finally trade at a reasonable valuation. Coca-Cola currently trades at 16.5 times 2011 expected earnings, much lower than it did a decade ago. That's not extremely cheap by any means, but it's much more realistic than before.
Foolish bottom line
The next time an investor points to a stagnating stock price as a reason for avoiding a stock, don't be swayed. One should examine a company's earnings power and its growth over time before making any claims that a company is unsuitable for investment. A falling stock price may signal dwindling earnings. But there's a chance it could instead reveal an extremely high past stock price that's reverting back to a more realistic level.
If Coca-Cola can continue to increase its numbers as it has in the past, the stock price should reverse the curse and move meaningfully higher. To keep up-to-date on Coca-Cola's progress, click here to add it to your free Fool stock watchlist.
